Banks in the EU have made “significant strides” in managing climate and nature-related risks, with a sharp increase in the adoption of advanced practices to identify and monitor these risks over the past few years.

Despite the improvements, the ECB emphasized that further work is needed to ensure these risk management practices are consistently applied across all relevant exposures, risk categories, and regions. This update follows the ECB’s 2022 decision to prioritize climate change in its supervisory agenda for the 2023–2025 period, after earlier assessments revealed that banks needed to better incorporate climate risks into their frameworks and were still heavily exposed to high-emission sectors.

Recent data shows that by the end of 2024, 56% of banks had implemented leading climate and environmental risk management practices for at least part of their portfolios—up from just 3% in 2022. Additionally, the share of banks with no such practices dropped from 25% in 2022 to 5% in 2024.

Materiality assessments have also become more refined, with over 90% of banks now identifying themselves as materially exposed to climate and environmental risks, compared to only half in 2021. Moreover, all banks now include climate risk in their stress testing frameworks, a significant increase from 41% in 2022.

However, several shortcomings remain. Many banks still apply sound practices only to a limited subset of exposures or risk types. For example, mortgage lending is not always fully accounted for, and banks are generally more advanced in managing credit risk than operational or market risk.

While climate risk is now commonly integrated into stress testing frameworks, some banks have yet to include all relevant risk drivers, portfolios, or transmission channels. Most institutions also do not yet fully incorporate all material climate and nature-related risks into their capital adequacy assessments.

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